Public Information in Populations with Heterogenous Interests

Public signals are well-known to be particularly influential when privately informed agents interact strategically (e.g. Morris and Shin AER 2002). Public signals are by definition common knowledge and that fact makes such signals particularly useful for individual agents who want to predict other agents' actions. However, that a signal is "public" in the common knowledge sense is a much stronger assumption than what is implied by the everyday meaning of the word. Among the vast amount of information that is publicly available, only a small subset is public in the common knowledge sense that everybody knows that everybody knows, and so on, that everybody knows that everybody observed a particular piece of information. In this paper we will argue that it is useful to make a distinction between information that is public in the strong common knowledge sense of the word and information that is merely publicly available. In this paper, a simple model is presented in which a large number of agents populate an economy where a large number of events occur. Events are defined as a realization of a latent variable. Agents are heterogenous in the sense that information about some events are more useful (or interesting) to some agents than to others. Agents have a choice between different information providers, where an information provider is defined by a news selection function. The news selection function of a particular information provider determines which events the provider will report conditional on the entire set of realized events. The entire set of potentially interesting events is larger than the set of events that can be reported. That is, information providers perform an editorial service for their customers by selecting which events to report. An individual optimizing agent will choose the information provider that has the news selection function that best suit the individual agent's informational needs. Agents have to choose information providers ex ante and this choice can then not be based on the realized events. Instead, an individual agent will choose to get information from the provider that he expects to report the most interesting events. The optimal choice will depend on the preferences of the agent, the news selection functions available and the distribution of events. The structure of the information provision sector is determined in a market where information providers compete for audiences. The set of news selection functions available to choose from is thus an endogenous object. Unless fixed costs of providing information are very large, there will be several specialized information providers that cater to diverse audiences.